MNI (NEW YORK) - HIGHLIGHTS:
- 25bp Fed Cut Wednesday Remains On Track After Mixed US Data
- Gilts Have Worst Session Since Oct On Upside UK Wage Surprise
- GBP Outperforms, Yen Recovers Well
US TSYS: Nascent Recovery Gives Way Pre-FOMC
Treasuries were mostly flat Tuesday, with little apparent conviction ahead of the FOMC meeting.
- A sell-off in UK Gilts saw Treasuries weaken overnight, with cash yields rising ~3bp more or less in parallel across the curve.
- After futures dipped through support at 109-20 (Nov 20/21 low), reaching a low of 109-17, Treasuries saw a modest recovery after US retail sales data came in more or less in line, and industrial production was on the weak side (the Atlanta Fed's GDP nowcast was downgraded 0.2pp for Q4 to 3.1% following the data).
- There was a final pullback of a few ticks into the close on elevated volumes that saw end basically unchanged for the session, and with no apparent trigger this appeared more like anticipation of Wednesday's FOMC decision.
- There was little reaction to a 20Y auction that tailed 1.5bp, but was at least better than November's much poorer sale.
- The cash curve was almost entirely unchanged on the day, with 5s and 10s yields unchanged and 2s / 30s yields very slightly lower.
- Analysts are unanimous in expecting a 25bp rate cut from the FOMC Wednesday, but there are varying opinions on the path of rates ahead and the number of cuts that the Fed will signal in its Dot Plot for 2025. We go through what to watch for in detail in our MNI Fed Preview.
- Latest levels: The Mar 25 T-Note future is down 1.5/32 at 109-26, having traded in a range of 109-17 to 109-31.5. The 2-Yr yield is down 0.6bps at 4.2426%, 5-Yr is unchanged at 4.2571%, 10-Yr is unchanged at 4.3967%, and 30-Yr is down 1.1bps at 4.5876%.
AUCTIONS / SUPPLY:
US TSYS/SUPPLY: Review 20Y Bond Auction: Better Than Last, Not Better Than Most
- US TSY 19Y-11M BOND AUCTION: HIGH YLD 4.686%; ALLOT 81.64%
- US TSY 19Y-11M BOND AUCTION: DEALERS TAKE 17.90% OF COMPETITIVES
- US TSY 19Y-11M BOND AUCTION: DIRECTS TAKE 20.14% OF COMPETITIVES
- US TSY 19Y-11M BOND AUCTION: INDIRECTS TAKE 61.96% OF COMPETITIVES
- US TSY 19Y-11M BOND AUCTION: BID/COV 2.50
The $13B 20Y Bond auction tails by 1.5bp, with a high yield of 4.686% versus a when-issued yield at auction cut-off of 4.671%.
- That keeps the consecutive streak of tailed auctions alive at 4 for the 20Y, with the latest sale showing fairly average statistics though better than November (which saw a high yield almost identical to December's sale, at 4.680%):
- The 1.5bp tail compares to a 5-auction average of 1.3bp, though better than the 3.1bp seen in November.
- Dealers took down 17.9% of competitives (vs 22.6% prior, 14.8% 5-auction average), with indirects 62.0% (69.5% prior, 70.1% avg) and directs 20.1% (7.9% prior, 15.1% avg).
- Bid/cover of 2.50x was likewise unremarkable vs the 5-auction average 2.53x, but better than November's 2.34x.
- Apparently there weren't high hopes for the 20Y sale given recent poor sales, as there was very limited reaction in Treasury markets, with March TY futures down 1 tick at 109-29 vs pre-auction cutoff.
SOFR FIXES AND PRIOR SESSION REFERENCE RATES
US TSYS/OVERNIGHT REPO: SOFR Jumps, ON RRP Adjustment Eyed
Secured funding rates rose Monday, led by a 5bp jump in SOFR to a fresh December high of 4.65%. This was not a wholly unexpected development, with a key quarterly tax deadline and Treasury settlements seen applying upward pressure.
- The 7bp SOFR-EFFR spread is unusually high (EFFR printed 4.58% as usual) outside a month-end date, last being this wide on Oct 31.
- As noted yesterday, SOFR and other rates are set to subside later in the week before like being pressured again at month/quarter/year-end, with an additional factor applying downside pressure including a possible/likely 5bp downward adjustment to ON RRP on Thursday post-FOMC.
- Of eight analysts who expressed an opinion, 6 saw the Fed adjusting ON RRP 5bp lower this week, versus two (Citi and Wrightson ICAP) seeing such a tweak as taking place at a future meeting.
REPO REFERENCE RATES (rate, change from prev. day, volume):
* Secured Overnight Financing Rate (SOFR): 4.65%, 0.05%, $2360B
* Broad General Collateral Rate (BGCR): 4.61%, 0.02%, $842B
* Tri-Party General Collateral Rate (TGCR): 4.61%, 0.02%, $818B
New York Fed EFFR for prior session (rate, chg from prev day):
* Daily Effective Fed Funds Rate: 4.58%, no change, volume: $99B
* Daily Overnight Bank Funding Rate: 4.58%, no change, volume: $224B
US TSYS/OVERNIGHT REPO: ON RRP Takeup Ticks Higher After 3+ Year Lows
Takeup of the Fed's overnight reverse repo facility ticked up $7.3B Tuesday to $118.1B after 3 consecutive drops that saw facility usage fall around $70B to the lowest level since April 2021.
- After dipping partly on account of Treasury settlements, ON RRP takeup is seen ticking higher through the coming sessions - with most attention in the space on whether the Fed as expected drops the ON RRP offer rate 5bp vs other administered rates.
SOFR FIX - Source BBG/CME
- 1M 4.36635 -0.00886
- 3M 4.35285 0.00147
- 6M 4.27749 0.00476
- 12M 4.17776 0.00671
BONDS: EGBs-GILTS CASH CLOSE: Gilts Have Worst Session Since Oct On UK Wage Data
Gilts sold off Tuesday in a bear steepening move as stronger-than-expected UK wage data pared expected BoE rate cuts.
- Higher-than-expected UK wage data set a hawkish tone for the session, including private sector regular AWE which at 5.4% 3mY/Y (versus expected 5.0%).
- The unexpectedly strong wage data offered reason to expect MPC members to be more cautious at this week's meeting, reducing scope for additional dovish dissenters to the expected hold (almost 100% priced) announced Thursday. MNI sees an 8-1 vote to hold, with Dhingra dissenting in favour of a cut.
- Futures now see under 60bp of cuts through 2025, having pared 15bp from the path today alone. Whereas the first cut had been fully priced by March, it's now seen only by May.
- Conversely, Bunds were supported by weak IFO survey data, and a less onerous than expected 2025 German funding plan.
- The UK curve bear flattened on the day as yields rose the most since Oct 31, with Germany's curve twist flattening (with a modest uptick in short-end yields). 10Y Gilt/Bund spread closed at the widest (229bp) since 1990.
- Periphery / semi-core EGB spreads were little changed.
- The UK data spree continues Wednesday with CPI (preview here), and the BoE decision looms Thursday. We also get final Eurozone Nov inflation, and an MNI Webcast featuring ECB chief economist Lane.
Closing Yields / 10-Yr EGB Spreads To Germany
- Germany: The 2-Yr yield is up 0.1bps at 2.051%, 5-Yr is down 0.4bps at 2.067%, 10-Yr is down 1.7bps at 2.23%, and 30-Yr is down 3.1bps at 2.452%.
- UK: The 2-Yr yield is up 9.6bps at 4.453%, 5-Yr is up 9.1bps at 4.371%, 10-Yr is up 8.2bps at 4.524%, and 30-Yr is up 5.9bps at 5.047%.
- Italian BTP spread up 0.1bps at 115.5bps / French OAT up 0.6bps at 80.5bps
EUROPE OPTIONS: Large Gilt Call Spread, Schatz Feature Tuesday
Tuesday's Europe rates/bond options flow included:
- DUF5 107.40c, bought for half in 6.5k.
- DUG5 107.20/107.50cs 1x2, bought for 2.5 and 3 in 3.25k.
- DUG5 107.20/107.60cs 1x2, sold at 4.5 in 7.5k.
- RXG5 136.00/137.50cs, bought for 28 in 6k.
- G G5 97.50/98.50 call spread, paper pays 4.0 to 5.0 on 10.65k
- ERH5 97.75/97.85/98.00c fly, bought for 1.5 in 2k.
FOREX: Japanese Yen Recovers Well Amid Turnaround for US Yields
- In the penultimate trading session before the Fed’s final decision of the year, US Treasuries have seen solid two-way price action. The US 10-year yield rose as high as 4.44% before retreating back to 4.38% and in sympathy, USDJPY has seen a roughly 100 pip pullback from intra-day highs to 153.35 as we approach the APAC crossover.
- GBP is in favour Tuesday, as wages data released pre-market came in ahead of expectations and showed early signs of a reversal in momentum for private wages - posing problems for any MPC members that may have looked to vote for a rate cut at this week's BoE decision. As a result, markets further trimmed rate cut bets across 2025.
- GBPUSD (+0.25%) has risen back above the 1.27 handle and key resistance to monitor is 1.2811, the Dec 6 high. EURGBP finds itself closer to cycle lows, trading around 0.8250 at typing, ahead of the major support at 0.8203, the Mar 7 ‘22 low and the lowest point of a multi-year range.
- Softer equities have weighed on the likes of AUD, NZD and CAD, all falling around half a percent. The Euro relatively outperforms and continues to oscillate around the 1.05 mark.
- In emerging markets, the Brazilian Real saw sharp volatility and the central bank had to intervene on two separate occasions to curb the declines. USDBRL rose to a record high of 6.2080, before the BCB used their most forceful intervention yet to stabilise the Real back to 6.10 per dollar.
- UK inflation data headlines the Wednesday data calendar before the focus turns to the December FOMC decision.
FOREX: FX OPTION EXPIRY - Some large Expiry in the EUR
FX OPTION EXPIRY: Watch the EUR on Friday.
Of note:
EURUSD 1.74bn at 1.0525.
EURUSD 1.02bn at 1.0500 (wed).
AUDUSD 1.01bn at 0.6350 (wed).
USDJPY 1.49bn at 155.00 (thu).
EURUSD 4.75bn at 1.0450, 7.24bn at 1.0500, 3.35bn at 1.0525 (fri).
EURGBP 2.6bn at 0.8290/0.8300 (fri).
USDCAD 3bn at 1.4200/1.4220 (fri).
AUDUSD 1.6bn at 0.6350 (fri).
USDCNY 2.83bn at 7.3000 (fri).
EURUSD 1.94bn at 1.0500 (mon).
- EURUSD: 1.0400 (955mln), 1.0425 (269mln), 1.0475 (858mln), 1.0525 (1.74bn).
- GBPUSD: 1.2640 (600mln).
- USDCAD: 1.4240 (520mln).
EQUITY TECHS: E-MINI S&P: (H5) Bulls Remain In The Driver’s Seat
- RES 4: 6184.00 1.236 proj of the Aug 5 - Sep 3 - 9 price swing
- RES 3: 6200.00 Round number resistance
- RES 2: 6194.19 1.236 proj of the Aug 5 - Sep 3 - 9 price swing
- RES 1: 6178.75 High Dec 6 and the bull trigger
- PRICE: 6130.25 @ 14:44 GMT Dec 17
- SUP 1: 6103.12 20-day EMA
- SUP 2: 6043.00/6010.18 Low Nov 26 / 50-day EMA
- SUP 3: 5970.25 Low Nov 21
- SUP 4: 5921.00 Low Nov 19
The S&P E-Minis contract is unchanged. The outlook remains bullish and the latest shallow pullback is considered corrective. Recent gains confirmed a resumption of the uptrend. Note that moving average studies are in a bull-mode set-up, highlighting a dominant uptrend and positive market sentiment. A resumption of the trend would open 6194.19, a Fibonacci projection. Initial support to watch lies at 6103.12, the 20-day EMA.
| Date | GMT/Local | Impact | Country | Event |
| 18/12/2024 | - |  JP | Bank of Japan Meeting | |
| 18/12/2024 | - |  SE | Riksbank Meeting | |
| 18/12/2024 | 0700/0700 | *** |  GB | Consumer inflation report |
| 18/12/2024 | 0700/0700 | *** | GB | Producer Prices |
| 18/12/2024 | 0700/1500 | ** |  CN | MNI China Money Market Index (MMI) |
| 18/12/2024 | 0900/1000 |  EU | ECB's Lane in fireside chat at MNI Connect Event | |
| 18/12/2024 | 1000/1100 | *** | EU | HICP (f) |
| 18/12/2024 | 1000/1100 | ** | EU | Construction Production |
| 18/12/2024 | 1100/1100 | ** | GB | CBI Industrial Trends |
| 18/12/2024 | 1200/0700 | ** |  US | MBA Weekly Applications Index |
| 18/12/2024 | 1330/0830 | * | US | Current Account Balance |
| 18/12/2024 | 1330/0830 | *** | US | Housing Starts |
| 18/12/2024 | 1530/1030 | ** | US | DOE Weekly Crude Oil Stocks |
| 18/12/2024 | 1900/1400 | *** | US | FOMC Statement |
| 19/12/2024 | 2145/1045 | *** |  NZ | GDP |
| 19/12/2024 | - |  NO | NorgesBank Meeting | |
| 19/12/2024 | 0001/0001 | * | GB | Brightmine pay deals for whole economy |
| 19/12/2024 | 0300/1200 | *** | JP | BOJ Policy Rate Announcement |